Major oil companies are grappling with two huge problems – how to navigate their way through the demand and revenue slump triggered by the Covid-19 lockdown, and how to reposition their businesses for the longer term as the world moves towards a lower carbon future.
In the minds of many executives, the two are interlinked – the coronavirus crisis has provided a grim preview of what a world of constrained oil and gas demand will look like, and could also accelerate a transition to greener energy sources, as governments and economies try to “build back better” after the pandemic. That puts pressure on oil companies to take steps now to protect their balance sheets to weather the current storm, but also to step up efforts to adapt for an energy transition that could arrive sooner than they had expected.
The outlook is far from clear – in the short term, while many countries are emerging tentatively from lockdown, fears of a second wave and further economic damage remain, while other governments are still struggling to tame the initial outbreak. In the long term, when Covid-19 is finally brought under control, it’s far from a given that the world will “build back better”, and there’s already evidence in places like Norway that long-term climate goals may have to take second place to the need to find the quickest and easiest ways to create jobs and revive ailing economies.
Nor are all companies on the same page. Urgency around the need to adapt for an energy transition is strongest among Europe’s private sector oil giants – Shell, BP, Total, Repsol and Eni. Their US peers Exxon and Chevron are more committed to the industry’s traditional business model, more bullish about medium-term prospects for oil and gas demand, and remain sceptical of the economics of many low-carbon energy technologies – views understandably shared to a great extent by most of the world’s national oil companies and their producer government owners.
But amid the uncertainty, real and strikingly decisive action is being taken. Shell in April announced the first cut in its dividend in more than 70 years, a move intended both to ease short-term financial pressures and to give the company “room to manoeuvre”, CEO Ben van Beurden said, to become a different, greener kind of energy business in the future.
BP, which under its new boss Bernard Looney has set much more aggressive targets for reducing its carbon footprint and moving to a new lower-carbon business model, has announced job cuts and write-downs of some exploration assets that don’t fit its new long-term view. It is also likely to follow Shell and cut its dividend – 68% of respondents to an Argus Twitter poll this week said they expected the UK company to announce a cut when it unveils its 2Q earnings in August.
However uncertain the outlook, these moves underline that, amplified and accelerated to a degree by the coronavirus pandemic, the energy transition is getting very real for some companies. Sceptics might argue that these firms are using long-term green goals to put a more positive spin on a desperately negative situation, but rebasing your business around a lower dividend expectation or lower oil and gas price assumptions looks very consistent with prudent preparation for future carbon-constrained demand.
Such moves also send a long-overdue signal to investors, governments and civil society that the financial strength of these companies, whose hefty pay-outs have for decades supported stock market returns and underpinned the performance of the pension funds on which many ordinary citizens depend, cannot be taken for granted as the energy transition draws closer.